Canada near peak for ETF players, official says

TORONTO • Canada’s exchange-traded fund market has reached a saturation point and any firms with less than $1 billion in assets should be “very concerned” about the future, according to the sales chief at one of the country’s top providers.

Canada is swimming in ETFS, with 725 listed funds versus 2,130 in the U.S., according to data from National Bank of Canada. That means Canada, with 1/10 the population of the U.S., has more than three times the number of ETFS per capita. Last year Canada added 169 new products compared with 270 in the U.S.

Add to this a slowdown in asset growth and it’s creating a difficult environment for new entrants, said Mark Noble, head of sales strategy at Horizons ETFS Management Canada Inc., the country’s fourth-largest ETF provider. “The opportunity set is really drying up for new ETF providers,” said Noble, whose firm manages $10.3 billion. “I think for a lot of them the horse has left the barn in terms of trying to capture growth.”

ETF inflows are still strong, with the industry attracting $11 billion in assets over the first seven months of 2018, but they’ve slowed from last year’s inflows, which reached $15.8 billion over the same period, according to National Bank.

Those flows are mostly going to the largest established providers, making it increasingly difficult for new entrants to capture assets, Noble said. The top three providers in Canada are Blackrock Inc.’s ishares, BMO Asset Management Inc. and Vanguard Investments Canada Inc.

Many new entrants are existing mutual-fund companies that decided to diversify into ETFS to offset redemptions in their traditional funds. Even though these firms have well-known brand names, they’re taking a risk if they offer ETFS that stray outside their traditional areas of expertise, Noble said.

Analysts and executives in the ETF industry dispute that there’s trouble ahead for those just getting in.

“The manufacturer entering the market today does need to put in place some sort of differentiator or value that sets them apart,” said Florence Narine, senior vice president and head of product at AGF Management Ltd., a mutual-fund provider that started offering ETFS in early 2017 and now has $723 million under management in that business.

AGF tries to avoid overlap with its mutual-fund offerings, and Narine cited its Infrastructure ETF and ESG Factors ETF as two of its more popular offerings.

“It is an ideal model for picking up on nuance and thematic aspects of the market,” she said. “I can only see it continuing to grow.”

Michael Cooke, head of the $2.8 billion ETF business at Mackenzie Investments Corp., said growing competition means Canadian providers need to have a clear game plan.

“It becomes pretty apparent if you’re a newer issuer that doesn’t have a wellcrafted strategy and quite frankly the expertise that goes along with that,” he said.

There’s still plenty of room for Canada’s market to grow, said Daniel Straus, vice president of ETFS and financial products research at National Bank. While ETFS in Canada capture about 10 per cent of the market, in the U.S. it’s closer to 20 per cent.

“If the U.S. is at all a leading indicator for how Canadian investors might behave, the ETF market in Canada could be twice as big as it currently is and still be growing,” he said. “I still think there’s room for a long tail of smaller boutique asset managers who are offering a handful of unique solutions.”